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Exelon-PSEG Divestiture Plans Drawing Capacity Swap Interest

Companies are expressing an interest in swapping capacity in response to plans by Exelon and Public Service Enterprise Group Inc. (PSEG) to divest a total of 2,900 MW worth of fossil fuel facilities outlined in a merger-related filing made by Exelon and PSEG earlier this month at FERC, a top Exelon official said on Thursday.

The 2,900 MW figure includes approximately 1,000 MW of peaking capacity and 1,900 MW of mid-merit capacity, of which at least 550 MW must be coal-fired.

"Whether we sell them for cash or we swap the capacity into other markets, we're open minded and the FERC is open to that as well," said Exelon CFO Robert Shapard in an appearance before the 2005 UBS Natural Gas and Electric Utilities Conference in New York City.

He disclosed that "We have had some interest expressed in swapping. Other companies who perhaps have had market power challenges in terms of meeting market power screens in their markets are interested in swapping capacity to help solve our market power problems and theirs."

Shapard said that Exelon "would consider that if it's a market we want to be in. If it's not, we will focus more on just selling assets. We think there'll be reasonable interest in assets in PJM. The recent development and proposals on a long-term capacity market in PJM have certainly been positive" and "adds value to some of the peaking capacity that didn't exist before, which we think will serve us well in this process."

The Exelon CFO went on to say that "we'll see some players interested in just acquiring baseload. Some will want a vertical slice of base intermediate and peaking. We're pretty open to what we do here and we'll work with a number of parties to see what makes the most sense. We think we can find some good value here in these assets."

Shapard said that if Exelon uses "this as an opportunity to swap into, or use the cash to buy into, some of the other competitive markets, if we see value there we'll do that. If we don't and simply take the cash, we'll probably give it back to the shareholders."

The company has "talked to a few people who have ideas on packages they'd like to propose to us," the CFO said in response to an analyst's question. "And we and the FERC are both flexible on what assets are sold."

Shapard said that the capacity swap option would only be appealing to Exelon if "it's a market that we're interested in being in, which probably needs to be a market that's competitive, which implies markets like Texas, where we've got assets already, it's a competitive model. New England -- even though we left New England -- we're willing to go back. It's all a matter of price. The obvious choice are the competitive markets for a swap."

As for timing on divestiture deals, the Exelon official said that "We would like to have at least some of this done by closing [of the merger] and just contingent on the close of the deal...we do want some time on the back end because we don't want a gun to our head to have to do everything by closing. But ideally if we can find something that makes sense for us and another party, we'd have it in place by the time this deal closes."

Shapard told analysts that a "perfect situation is for us [to] do a combination of some swaps, where we can improve our position in other markets, might be a value neutral deal -- earnings neutral deal -- but it gives us better diversification, and some [deals] just for cash."

Exelon and PSEG have also proposed to transfer control of the energy from 2,600 MW of baseload nuclear capacity (including 2,400 MW in PJM-East) in what they term a "virtual divestiture."

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